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ADI > SEC Filings for ADI > Form 10-K on 27-Nov-2012All Recent SEC Filings

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Form 10-K for ANALOG DEVICES INC


27-Nov-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (all tabular amounts in thousands except per share amounts)

During the first quarter of fiscal 2008, we sold our baseband chipset business and related support operations, or Baseband Chipset Business, to MediaTek Inc. and sold our CPU voltage regulation and PC thermal monitoring business to certain subsidiaries of ON Semiconductor Corporation. The financial results of these businesses are presented as discontinued operations in the consolidated statements of income for all periods presented. Unless otherwise noted, this Management's Discussion and Analysis relates only to financial results from continuing operations.

Results of Operations
Overview
                                      Fiscal Year                         2012 over 2011               2011 over 2010
                         2012            2011            2010          $ Change      % Change       $ Change       % Change
Revenue              $ 2,701,142     $ 2,993,320     $ 2,761,503     $ (292,178 )     (10 )%     $    231,817          8 %
Gross Margin %              64.5 %          66.4 %          65.2 %
Net income from
Continuing
Operations           $   651,236     $   860,894     $   711,225     $ (209,658 )     (24 )%     $    149,669         21 %
Net income from
Continuing
Operations as a % of
Revenue                     24.1 %          28.8 %          25.8 %
Diluted EPS from
Continuing
Operations           $      2.13     $      2.79     $      2.33     $    (0.66 )     (24 )%     $       0.46         20 %
Diluted EPS          $      2.13     $      2.81     $      2.33     $    (0.68 )     (24 )%     $       0.48         21 %

Fiscal 2012 was a 53-week year. Fiscal 2011 and fiscal 2010 were 52-week years. The additional week in fiscal 2012 was included in the first quarter ended February 4, 2012.
The year-to-year revenue changes by end market and product category are more fully outlined below under Revenue Trends by End Market and Revenue Trends by Product Type.
During fiscal 2012, our revenue decreased 10% compared to fiscal 2011. Our diluted earnings per share from continuing operations decreased to $2.13 in fiscal 2012 from $2.79 in fiscal 2011. Cash flow from operations in fiscal 2012 was $814.5 million, or 30.2% of revenue. During fiscal 2012, we received $191.2 million in net proceeds from employee stock option exercises, repurchased a total of approximately 4.2 million shares of our common stock for an aggregate of $160.5 million, distributed $344.7 million to our shareholders in dividend payments, paid $56.5 million in principal payments related to our $145.0 million term loan facility, paid $132.2 million for property, plant and equipment additions and paid $24.2 million, net of cash acquired, for the acquisition of Multigig. In addition, we paid $1,183.5 million for the net purchase of short term available-for-sale investments. These factors contributed to the net decrease in cash and cash equivalents of $876.3 million in fiscal 2012. The year-to-year decrease in revenue and profitability for fiscal 2012 was primarily the result of continued slowdown in the growth of the global economy. Our customers were increasingly cautious through the year and reduced the inventory levels of our products. We believe that our variable cost structure and continued efforts to manage production, inventory levels and expenses helped to mitigate the effect that these lower sales levels had on our earnings.


Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of
revenue by end market is determined using a variety of data points including the
technical characteristics of the product, the "sold to" customer information,
the "ship to" customer information and the end customer product or application
into which our product will be incorporated. As data systems for capturing and
tracking this data evolve and improve, the categorization of products by end
market can vary over time. When this occurs, we reclassify revenue by end market
for prior periods. Such reclassifications typically do not materially change the
sizing of, or the underlying trends of results within, each end market.
                             2012                          2011                      2010
                                % of                               % of                      % of
                               Total                              Total                     Total
                              Product                            Product                   Product
                 Revenue      Revenue     Y/Y%      Revenue      Revenue      Revenue      Revenue
Industrial     $ 1,240,344        46 %   (12 )%   $ 1,411,386        47 %   $ 1,280,027        46 %
Automotive         463,577        17 %    11  %       417,929        14 %       335,163        12 %
Consumer           467,626        17 %   (16 )%       559,142        19 %       605,541        22 %
Communications     529,595        20 %   (12 )%       604,863        20 %       540,772        20 %
Total Revenue  $ 2,701,142       100 %   (10 )%   $ 2,993,320       100 %   $ 2,761,503       100 %

Industrial - The year-to-year decrease in revenue from fiscal 2011 to fiscal 2012 in industrial end market revenue was primarily the result of a broad-based decrease in demand in this end market related to ongoing global macro-economic weakness. The year-to-year decrease was most significant for products sold into the industrial automation and instrumentation sectors. The year-to-year increase in revenue from fiscal 2010 to fiscal 2011 in industrial end market revenue was primarily the result of a broad-based increase in demand in this end market, which was most significant for products sold into the automation and instrumentation sectors and, to a lesser extent, products sold into the energy and healthcare sectors.
Automotive - The year-to-year increase in revenue from fiscal 2011 to fiscal 2012 in automotive end market revenue was primarily the result of an increase in the electronic content in automobiles used in infotainment applications and to a lesser extent in power train and safety applications and a general increase in demand by our customers. The year-to-year increase in revenue from fiscal 2010 to fiscal 2011 in automotive end market revenue was primarily the result of a general increase in the electronic content found in vehicles and, to a lesser extent, a general increase in demand by our customers.
Consumer - The year-to-year decrease in revenue from fiscal 2011 to fiscal 2012 in consumer end market revenue was primarily the result of a broad-based decrease in demand for products sold in this end market. The year-to-year decrease in revenue from fiscal 2010 to fiscal 2011 in consumer end market revenue was primarily the result of a decrease in demand for products in the digital camera and home entertainment sector primarily as a result of the impact of the earthquake and tsunami that occurred in Japan in March 2011, partially offset by an increase in demand for products used in portable devices in this end market.
Communications - The year-to-year fluctuations in communications end market revenue for the years presented are primarily the result of broad-based demand shifts in this end market, which were most significant for products sold into the wireless base station end market sector.


Revenue Trends by Product Type
The following table summarizes revenue by product categories. The categorization of our products into broad categories is based on the characteristics of the individual products, the specification of the products and in some cases the specific uses that certain products have within applications. The categorization of products into categories is therefore subject to judgment in some cases and can vary over time. In instances where products move between product categories, we reclassify the amounts in the product categories for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each product category.

                                        2012                             2011                       2010
                                           % of                                  % of                       % of
                                           Total                                Total                      Total
                                          Product                              Product                    Product
                            Revenue      Revenue*     Y/Y%        Revenue      Revenue       Revenue      Revenue
Converters               $ 1,192,064         44 %     (11 )%   $ 1,343,487         45 %   $ 1,295,700         47 %
Amplifiers/Radio
frequency                    697,687         26 %     (11 )%       788,299         26 %       701,557         25 %
Other analog                 397,376         15 %      (3 )%       410,323         14 %       334,663         12 %
Subtotal analog signal
processing                 2,287,127         85 %     (10 )%     2,542,109         85 %     2,331,920         84 %
Power management &
reference                    182,134          7 %     (16 )%       217,615          7 %       194,740          7 %
Total analog products    $ 2,469,261         91 %     (11 )%   $ 2,759,724         92 %   $ 2,526,660         91 %
Digital signal
processing                   231,881          9 %      (1 )%       233,596          8 %       234,843          9 %
Total Revenue            $ 2,701,142        100 %     (10 )%   $ 2,993,320        100 %   $ 2,761,503        100 %


_____________________________________


* The sum of the individual percentages do not equal the total due to rounding.

The year-to-year fluctuations in total revenue for the years presented were the result of a broad-based demand shift across all product categories. Revenue Trends by Geographic Region
During fiscal year 2012 we changed our method for classifying revenue by geographic region to more accurately reflect the primary location of our customers' design activity for our products. Prior periods have been reclassified to align with this definition. In general, the prior classification method reflected the customers' manufacturing location or the distributors' stocking territory. No changes have been made to our revenue recognition policy. A breakdown of our fiscal 2012, 2011 and 2010 revenue by geographic location follows.

                                                                                               Change
                                          Fiscal Year                         2012 over 2011             2011 over 2010
                             2012            2011            2010          $ Change      % Change      $ Change    % Change
United States            $   818,653     $   866,142     $   794,463     $  (47,489 )      (5 )%     $  71,679        9  %
Rest of North and South
America                      114,133         144,585         134,327        (30,452 )     (21 )%        10,258        8  %
Europe                       852,668         967,417         816,561       (114,749 )     (12 )%       150,856       18  %
Japan                        333,558         398,587         433,706        (65,029 )     (16 )%       (35,119 )     (8 )%
China                        341,196         360,594         320,739        (19,398 )      (5 )%        39,855       12  %
Rest of Asia                 240,934         255,995         261,707        (15,061 )      (6 )%        (5,712 )     (2 )%
Total Revenue            $ 2,701,142     $ 2,993,320     $ 2,761,503     $ (292,178 )     (10 )%     $ 231,817        8  %

In fiscal years 2012, 2011 and 2010, the predominant countries comprising "Rest of North and South America" are Canada and Mexico; the predominant countries comprising "Europe" are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising "Rest of Asia" are Taiwan and South Korea. Sales decreased in all regions in fiscal 2012 as compared to fiscal 2011 as a result of a broad-based decrease in demand.


Sales increased in all geographic regions, except Japan and Rest of Asia, in fiscal 2011 as compared to fiscal 2010, primarily as a result of increases in sales activity in the industrial, automotive and communications end market sectors. The year-to-year decrease in sales in Japan and Rest of Asia was primarily the result of lower sales activity in the consumer end market sector in this region due to the earthquake and tsunami that occurred in Japan in March 2011.

Gross Margin
                                                                                           Change
                                    Fiscal Year                         2012 over 2011               2011 over 2010
                       2012            2011            2010          $ Change      % Change       $ Change       % Change
Gross Margin       $ 1,741,001     $ 1,986,541     $ 1,799,422     $ (245,540 )     (12 )%     $    187,119         10 %
Gross Margin %            64.5 %          66.4 %          65.2 %

Gross margin percentage in fiscal 2012 decreased 190 basis points compared to fiscal 2011 primarily as a result of decreased operating levels in our manufacturing facilities as well as a reduced percentage of sales of our products sold into the industrial automation and instrumentation sectors of the industrial end market and the wireless base station sector of the communications end market, which earn higher margins as compared to products sold into our other end market sectors.
Gross margin percentage in fiscal 2011 increased 120 basis points compared to fiscal 2010 primarily as a result of an increase in sales of $231.8 million, increased operating levels in our manufacturing facilities and the impact of efforts to reduce overall manufacturing costs, including the savings realized as a result of our wafer fabrication consolidation actions. Additionally, a higher proportion of our revenues were from products sold into the instrumentation and automation sectors of the industrial end market, which earn higher margins as compared to products sold into our other end markets. Research and Development (R&D)

                                                                                        Change
                                 Fiscal Year                         2012 over 2011                 2011 over 2010
                      2012          2011          2010           $ Change         % Change       $ Change       % Change
R&D Expenses       $ 512,003     $ 505,570     $ 492,305     $     6,433             1 %      $     13,265         3 %
R&D Expenses as a
% of Revenue            19.0 %        16.9 %        17.8 %

R&D expenses increased in fiscal 2012 as compared to fiscal 2011 as a result of annual salary increases that became effective during the second quarter of fiscal 2012 and a general increase in spending, partially offset by lower variable compensation expense, which is linked to our overall profitability and revenue growth.
R&D expenses increased in fiscal 2011 as compared to fiscal 2010. The increase was primarily the result of higher employee salary and benefit expense due to salary increases that were effective in the second quarter of fiscal 2011, increased headcount, and a general increase in spending. These increases were partially offset by lower variable compensation expense, which is a variable expense linked to our overall profitability and revenue growth. R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth. We have hundreds of R&D projects underway, none of which we believe are material on an individual basis. We expect to continue the development of innovative technologies and processes for new products. We believe that a continued commitment to R&D is essential to maintain product leadership with our existing products as well as to provide innovative new product offerings, and therefore, we expect to continue to make significant R&D investments in the future.


Selling, Marketing, General and Administrative (SMG&A)

                                                                                     Change
                                 Fiscal Year                      2012 over 2011              2011 over 2010
                      2012          2011          2010        $ Change      % Change       $ Change       % Change
SMG&A Expenses     $ 396,519     $ 406,707     $ 390,560     $ (10,188 )      (3 )%     $     16,147         4 %
SMG&A Expenses as
a % of Revenue          14.7 %        13.6 %        14.1 %

SMG&A expenses decreased in fiscal 2012 as compared to fiscal 2011 as lower variable compensation expense, which is a variable expense linked to our overall profitability and revenue growth, was partially offset by annual salary increases that became effective during the second quarter of fiscal 2012. SMG&A, expenses increased in fiscal 2011 as compared to fiscal 2010. The increase was primarily the result of higher employee salary and benefit expense due to salary increases that were effective in the second quarter of fiscal 2011, increased headcount and a general increase in spending. These increases were partially offset by lower variable compensation expense, which is a variable expense linked to our overall profitability and revenue growth. Special Charges
We monitor global macroeconomic conditions on an ongoing basis, and continue to assess opportunities for improved operational effectiveness and efficiency and better alignment of expenses with revenues. As a result of these assessments, we have undertaken various restructuring actions over the past several years. The expense reductions relating to ongoing actions are described below. Closure of Wafer Fabrication Facility in Sunnyvale We ceased production at our California wafer fabrication facility in November 2006. We paid the related lease obligation costs on a monthly basis over the remaining lease term, which expired in March 2010. We recorded a one-time settlement charge of $0.4 million in fiscal 2010 related to the termination of the lease. This action was completed during fiscal 2010.

Reduction of Operating Costs
During fiscal 2008 through fiscal 2010, we recorded special charges of approximately $43.3 million. These special charges included: $39.1 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 245 manufacturing employees and 470 engineering and SMG&A employees; $2.1 million for lease obligation costs for facilities that we ceased using during the first quarter of fiscal 2009; $0.8 million for the write-off of property, plant and equipment; $0.5 million for contract termination costs and $0.3 million for clean-up and closure costs that were expensed as incurred; and $0.5 million related to the impairment of intellectual property. This action resulted in annual cost savings of approximately $52.0 million per year. We have terminated the employment of all employees associated with these actions.
During fiscal 2011, we recorded a special charge of approximately $2.2 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 25 engineering and SMG&A employees. This action was completed in the fourth quarter of fiscal 2012. This action resulted in annual cost savings of approximately $4.0 million. During fiscal 2012, we recorded special charges of approximately $8.4 million. The special charge included $7.9 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 95 manufacturing, engineering and SMG&A employees; $0.1 million for contract termination costs; $0.2 million for lease obligation costs for facilities that we ceased using during the third quarter of fiscal 2012 and $0.2 million for the write-off of property, plant and equipment. As of November 3, 2012, we employed 6 of the 95 employees included in this cost reduction action. These employees must continue to be employed by us until their employment is involuntarily terminated in order to receive the severance benefit. We estimate this action will result in annual savings in SMG&A expenses of approximately $12.0 million once fully implemented.


Closure of a Wafer Fabrication Facility in Cambridge During fiscal 2009 and fiscal 2010, we recorded special charges of $26.8 million as a result of our decision to consolidate our Cambridge, Massachusetts wafer fabrication facility into our existing Wilmington, Massachusetts facility. These special charges included: $7.4 million for severance and fringe benefit costs recorded in accordance with our ongoing benefit plan for 124 manufacturing employees and 9 SMG&A employees; $14.6 million for the impairment of manufacturing assets; $3.4 million for lease obligation costs for the Cambridge wafer fabrication facility, which we ceased using in the first quarter of fiscal 2010; and $1.4 million for clean-up and closure costs that were expensed as incurred. This action was completed during the third quarter of fiscal 2011. This action resulted in annual cost savings of approximately $43 million per year.
Operating Income from Continuing Operations

                                                                                       Change
                                  Fiscal Year                       2012 over 2011               2011 over 2010
                      2012           2011           2010         $ Change      % Change       $ Change       % Change
Operating income
from Continuing
Operations         $ 824,048     $ 1,072,025     $ 900,074     $ (247,977 )     (23 )%     $    171,951         19 %
Operating income
from Continuing
Operations as a %
of Revenue              30.5 %          35.8 %        32.6 %

The year-over-year decrease in operating income from continuing operations in fiscal 2012 as compared to fiscal 2011 was primarily the result of a decrease in revenue of $292.2 million and a 190 basis point decrease in gross margin percentage.
The increase in operating income from continuing operations in fiscal 2011 as compared to fiscal 2010 was primarily the result of an increase in revenue of $231.8 million and a 120 basis point increase in gross margin percentage. Nonoperating (Income) Expense

                                                                                        Change
                                           Fiscal Year                    2012 over 2011     2011 over 2010
                                2012           2011           2010           $ Change           $ Change
Interest expense            $   26,422     $   19,146     $   10,429     $       7,276      $         8,717
Interest income                (14,448 )       (9,060 )       (9,837 )          (5,388 )                777
Other, net                      (1,459 )          492         (2,183 )          (1,951 )              2,675
Total nonoperating expense
(income)                    $   10,515     $   10,578     $   (1,591 )   $         (63 )    $        12,169

The year-over-year increase in nonoperating interest expense in fiscal 2012 as compared to fiscal 2011 was primarily a result of our issuance of $375.0 million aggregate principal amount of 3.0% senior unsecured notes on April 4, 2011 which was partially offset by the impact of the termination of our interest rate swap agreement more fully described below under the heading Debt. The increases were partially offset by an increase in nonoperating interest income due to higher interest rates earned on our investments and the investment of higher cash balances in fiscal 2012 as compared to fiscal 2011, and an increase in nonoperating other income as a result of the gain from the sale of other investments in the second quarter of fiscal 2012.
The year-over-year increase in nonoperating expense (income) in fiscal 2011 as compared to fiscal 2010 was primarily due to an increase in interest expense incurred as a result of the issuance of $375 million aggregate principal amount of 3.0% senior unsecured notes on April 4, 2011, and the $145 million term loan facility entered into by a wholly owned subsidiary of ours in December 2010. In addition, we earned lower interest income as a result of lower interest rates in fiscal 2011 as compared to fiscal 2010, which was partially offset by interest earned on higher cash balances in fiscal 2011.


Provision for Income Taxes
                                                                                     Change
                                 Fiscal Year                      2012 over 2011              2011 over 2010
                      2012          2011          2010        $ Change      % Change       $ Change       % Change
Provision for
Income Taxes       $ 162,297     $ 200,553     $ 190,440     $ (38,256 )     (19 )%     $     10,113         5 %
Effective Income
Tax Rate                19.9 %        18.9 %        21.1 %

Our effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned.
Our effective tax rate for fiscal 2012 increased 100 basis points compared to our effective tax rate for fiscal 2011 due to the expiration of the U.S. federal research and development tax credit in December 2011.
Our effective tax rate for fiscal 2011 decreased 220 basis points compared to our effective tax rate for fiscal 2010 due to the impact of several discrete tax items. The effective tax rate for fiscal 2011 included the reinstatement of the federal R&D tax credit in December 2010 retroactive to January 1, 2010, resulting in a $6.0 million income tax savings; a $6.7 million reduction in the state tax credit valuation reserve; a $0.5 million tax benefit from the increase in Irish deferred taxes as a result of the increase in the Irish manufacturing tax rate from 10% to 12.5%; and a net $10.8 million tax benefit related to the settlement with the Appeals Office of the Internal Revenue Service of certain tax matters for the fiscal 2004 through fiscal 2007 tax years. Income from Continuing Operations, Net of Tax

                                                                                     Change
                                 Fiscal Year                      2012 over 2011               2011 over 2010
                      2012          2011          2010         $ Change      % Change       $ Change       % Change
Income from
Continuing
Operations, net of
tax                $ 651,236     $ 860,894     $ 711,225     $ (209,658 )     (24 )%     $    149,669         21 %
Income from
Continuing
Operations, net of
tax as a % of
Revenue                 24.1 %        28.8 %        25.8 %
Diluted EPS from
Continuing
Operations         $    2.13     $    2.79     $    2.33     $    (0.66 )     (24 )%     $       0.46         20 %

. . .
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